The European Monetary Union (EMU) was established as a formal objective in 1992 from the Treaty of Maastricht. In 1995 initial details of a union currency “the Euro” was announced and in 1998 the European Central Bank (ECB) was created and in 1999 the Euro underwent a 3 year transition introducing the Euro notes and coins. The purpose of this text is to analyse in detail EMU’s macroeconomic framework and performance and how this has evolved in the past 10 years. Firstly, I will look into the fiscal policy set out by the EMU however the bulk of the text will look into the monetary policy framework. Finally I will conclude by briefly trying to pin point the links between the macroeconomic framework to the current Eurozone crisis.

In general on average the Eurozone’s first decade is viewed as a success and the ECB met its targets by delivering low and stable inflation with an output gap consistently close to 0. However, if we inspect country by country, we witness a large variation. The macroeconomic framework of the EMU, takes 2 main forms Fiscal policy and Monetary Policy. National governments are responsible for their individual fiscal policy while the ECB undertook the responsibility of Monetary Policy. Under the umbrella of Fiscal policy, the Stability and Growth pact provides a clear economic boundary to all Eurozone members. The Stability and Growth Pact specifies 2 boundaries. Firstly, national budget deficits must be kept below 3% and secondly the ratio of the government debt to GDP ratio must be below 60%. Such Fiscal policy controls were put in place because of fears of spillovers to the Eurozone from national policy decisions. As an example, a government debt spillover directly relates to the recent Greek crisis. A country’s bond rates are affected by the differential risk of default. For the 9 years prior to May 2010, the difference of cost of